The New Principles of a Swarm Business

Throughout history, many valuable innovations have come not from a sole inventor tinkering away in his garage or laboratory but from the collective efforts of a team of people. Often the individuals in these groups are motivated by their devotion to an idea and to the collaborative process of working with others toward a common goal, knowing that their reward might be nothing more than the positive feelings that success breeds. They set out initially not with the thought of realizing a financial gain but rather to meet a challenge or solve a problem, and the resulting collaboration typically benefits those involved and sometimes even society as a whole. The swarming of bees is an archetype of this concept.1 With no central direction, bees self-organize to build nests, feed and nurture offspring, gather food and even decide on their next queen. Similarly, groups of humans swarming together for a common purpose can constitute a powerful collective mindset that unleashes tremendous creativity, spurring exciting and valuable innovations.

The famous example here is the development of the World Wide Web. Tim Berners-Lee, often credited as the father of the Web, and the countless others who worked on the effort were driven by an intrinsic motivation to tackle a technological challenge. If someone wanted to pursue a useful idea for extending the project — for instance, to include Web browsers and servers — the swarm embraced and supported the effort. There was no managerial hierarchy or proprietary ownership of ideas. Everyone cared deeply about the cause, not about rank, salary, status or money. They just wanted to get the job done, and in the end they changed the world with their innovation.

As the development of the Web exemplifies, selfless behavior is often the fuel that propels great ideas forward, and this sense of altruism permeates many successful swarm innovations. Indeed, members of a swarm typically reject the traditional business notion of building shareholder value as the basis for their decisions and actions. In its place, the swarm works toward the collective interest of stakeholders, which is broadly defined as any party that can affect or is affected by the innovation. From a business perspective, this includes more than just shareholders but also employees, customers, suppliers, partners and even competitors.

Interestingly, the World Wide Web, itself the product of swarm creativity, has exponentially expanded the ability of humans to engage in swarm creativity. Thanks to the Web and other forms of online communications, swarms can form instantaneously and collaborate on innovative tasks from almost anywhere on the planet, crossing all geopolitical borders and cultural lines. In every large company as well, groups of creative individuals form collaborative networks, irrespective of any direct or immediate connection to the bottom line. These networks are self-organized by people who are intrinsically motivated to explore and develop ideas that they care deeply about. (We use the acronym COIN — collaborative innovation network — to describe such systems.2)

Some companies have used collaborative innovation networks to facilitate close cooperation between customers and product developers. Take, for instance, the automaker Bayerische Motoren Werke AG of Munich, Germany. A large part of BMW’s innovation occurs in its highly successful M division, which is essentially a skunkworks3 that tunes more than 20,000 cars per year according to specific requests for customization from its most demanding customers. Many of the general enhancements developed in the M division have found their way into the more than one million premium-branded cars4 that BMW sold last year. At the same time, BMW posts numerous engineering challenges on its Web site, where customers and company designers network and collaborate to arrive at innovative solutions. After the company made a toolset available to help consumers design features of future cars, it received thousands of responses, and some of those ideas are now being implemented.5 Although BMW still displays plenty of old-school thinking, it has shown an exciting ability to embrace swarm creativity and the collective intelligence of its internal employees and external customers.

Now, collaborative innovation is being extended from the realm of idea generation and product development to the very essence of doing business. In fact, some companies have based their entire business models on collaborative networks of innovation. These swarm businesses pick up where the e-business craze stopped, with one crucial difference: E-businesses were primarily concerned with eyeballs (getting as many people as possible to visit a particular Web site), whereas swarm businesses strive mainly to create real value for the swarm.

An example here is Flickr, the online digital photo service. Through Flickr, people can store and share their photos electronically, either with just their family and friends or with the general public. The service also allows people to write captions for the photos and tag them, and the resulting metadata enable the images to be more easily browsed, searched and retrieved from a large repository. Other notable examples of companies harnessing the power of a swarm are Amazon.com Inc. of Seattle, Washington, which allows people to post their product reviews for others to read and sends customers suggestions of items that they might like, based on what similar individuals have bought in the past; and Wikipedia — a subsidiary of Wikimedia Foundation Inc. of St. Petersburg, Florida — the online encyclopedia that relies on a vast network of people to write, edit and fact-check the information listed in its entries.

But swarm businesses do not necessarily have to be cutting-edge companies born on the Web. Consider Migros, a retailer (part of the giant Federation of Migros Cooperatives) that was founded in Zurich in 1925 by the visionary Gottlieb Duttweiler. Currently the largest supermarket chain in Switzerland, the company has historically aimed to sell products at prices higher than wholesale but lower than retail. Of Switzerland’s population of more than seven million, around two million are members of the Migros cooperative.

Migros is primarily a self-organized entity, consisting of 10 large local cooperatives that have wide autonomy. The company is governed by a board as well as an assembly of delegates of the members of the cooperative (that is, the Swiss customers) who are democratically elected. Although there is a CEO, he has far less power than in the typical corporation. This structure, despite its unwieldy appearance, has enabled Migros to be a continuous innovator. In fact, from its opening day, the company has been a relentless trendsetter. In 1948, it introduced the first self-service stores in Switzerland, and in 1967 it began to include expiration dates on all its food products (something that has yet to be fully implemented in the United States). More recently, Migros launched its M-Budget product line in 1996, and the brand has achieved almost cultlike status, appealing not only to low-income customers to whom it was initially targeted but also to young, hip Swiss. Across the country, people flock to M-Budget parties in which the objective is for everything used and consumed to be from the M-Budget line of products. M-Budget also started a car-sharing business that is similar to the innovative Zipcar in the United States.

Migros owes much of its success to its swarm of devoted customers who have helped it expand into a wide range of markets, including banking, insurance, travel services and gasoline stations. In fact, the company has deployed the principles of a swarm business for decades to transform itself into one of the largest enterprises in Switzerland. Ironically, a growing number of high-tech and Web companies are only now rediscovering these same core principles. A look at each principle illustrates how swarm businesses differ from traditional companies in several fundamental ways.

Principle Number 1: Gain Power By Giving It Away

In a swarm business, a company gains power by giving it away. At first, this principle may sound counterintuitive and even nonsensical, but consider how MySpace.com of Santa Monica, California, became one of the most successful social-networking sites on the Web. MySpace allows users to create their own personal identities in the ways they want. This freedom is a large part of why the site has become so central to youth culture in the United States, allowing the company’s founders to complete a $580 million sale of the business to Rupert Murdoch’s New York-based News Corporation. Contrast this with Friendster Inc., a San Francisco-based company that began a similar site but with preset notions of how users should be compelled to create their profiles and what those profiles would have to include. From its launch, Friendster was a hot social-networking portal that grew rapidly, but it was soon eclipsed by MySpace. The difference: Friendster sought to control its users, whereas MySpace gained power by empowering them.

Relinquishing power also means listening to the swarm. Last September, Facebook Inc. of Palo Alto, California, the online diary and meeting site for teens and students, introduced a new feature that basically allowed any user to be notified when someone else made changes to his or her own homepage. This capability was considered to be an intrusion of privacy that apparently was too much even for today’s online youth. Ironically, it was the feature itself that proved useful in organizing an online protest because people could learn who else had joined the campaign, and the resulting avalanche of protest could not be hidden by Facebook’s operators. To its credit, Facebook listened to the criticism and gave control back to the users, allowing them to exclude selective areas of their pages from the public feed of information or choose to opt out from that service altogether.

Principle Number 2: Share With the Swarm

Companies that continually take from the swarm without giving anything back will have trouble building a business. It’s not that contributors in a swarm are mainly motivated by money or recognition — in fact, they are typically driven by a common purpose and not necessarily by any material rewards. Even so, swarm businesses must be careful that they aren’t viewed as passive freeloaders, but as active contributors.

Consider IBM Corp.’s recent efforts in software development. Historically, IBM relied on proprietary operating systems to sell its mainframes and other computers. Then, after losing market share to Microsoft Corp.’s Windows NT and UNIX in the 1990s, the company decided to throw its support behind Linux, the freely available operating system that was developed by an open source consortium. IBM currently spends about $100 million annually on Linux development, which may sound like a huge expenditure but is just a fraction of what the company used to spend on a proprietary operating system.6 In fact, IBM is not only the leading corporate sponsor of Linux, but the company has also released 500 of its software patents for free use by the open source community. In other bold moves, the company has donated computer code (value: $40 million) and a database program (estimated development cost: $85 million) to open source groups.7 Of course, IBM’s actions are hardly driven by pure magnanimity — the company is hoping that its gifts will spur swarms of open source developers toward future innovations, eventually creating new opportunities for IBM to sell hardware, other products and services. And IBM has hardly abandoned its past mindset — it recently filed two patent-infringement lawsuits against Amazon.com for data-storage and other interactive-service applications. Nevertheless, IBM is clearly coming to understand that membership in a swarm is a two-way street.

Truly becoming a part of a swarm, though, requires more than just sharing. Companies also need to immerse themselves into the swarm. Toyota Motor Corp., for example, does not rely solely on feedback from traditional market studies and customer surveys to understand what consumers truly want. The company has immersed itself into the swarm by branching out to operate Gazoo.com, a popular Web portal in Japan that began as a cybergateway for selling used cars but has since broadened into a variety of products — automotive items (brake pads, for instance) as well as stationery, compact discs and even food. Through the site, Toyota collects copious data, providing the company with a unique opportunity to feel the pulse of potential car buyers early in the sales process. These and other efforts have helped stoke Toyota’s creative fires: The company implements one million new ideas every year, or 2,500 per day8 — an accomplishment that would be impossible without collaborative innovation.

Principle 3: Concentrate On the Swarm, Not On Making Money

In a swarm business, companies may not make money where they think they will. Instead, revenues may likely come from unexpected places in surprising ways. Thus, when first building a swarm business, firms should not concern themselves with how they’ll profit from the venture. They should keep in check any preconceived ideas about their business models and instead focus on the swarm. Of course, that’s easier said than done, and the typical manager minding the bottom line can hardly be faulted for shunning any proposal that has no foreseeable return on investment. But the simple truth is that companies need to build value for the swarm first. Only after they accomplish this will they uncover the business model that will lead to profits.

This principle of swarm businesses — that of concentrating on the swarm and not on making money — might seem like sheer heresy. And skeptics may claim that only small private firms that don’t have to answer to impatient shareholders can afford to put the swarm above profits. But the truth is that even large public corporations can apply the new mindset. Case in point: Novartis AG, based in Basel, Switzerland. In 1996, after the Swiss pharmaceutical companies Sandoz and Ciba-Geigy merged to become life sciences giant Novartis, a massive layoff threatened the jobs of thousands of employees. But the new company established a large venture fund that offered financing to encourage the researchers and engineers who were losing their jobs to start their own companies. In its first four years, the fund supported 83 startups that created 1,000 new jobs.9 One of the success stories is AnTeq AG, founded in 2000 in Basel, Switzerland, by three former Novartis biologists. With financial help from the venture fund (as well as rented lab space from Novartis), AnTeq was able to develop its core business of producing transgenic mice to illuminate the functions of specific genes.

The Novartis fund provides a good example of a corporation being concerned more about the swarm than about the specific ways it was going to make money — the swarm, in this case, comprising the former Sandoz and Ciba-Geigy employees. And in the end, this approach paid back real dividends as the fund became highly profitable. In 2005 alone, six of the companies that the fund supported successfully went public.

The Three Principles in Action

The principles of swarm businesses have an almost Zen-like quality — for instance, the idea of gaining power by giving it away — and many executives may easily dismiss the concepts as too abstract and unrealistic. But a closer look at Migros, the Swiss retailer, helps illustrate that the three principles can be applied even in a stodgy industry like retailing.

Migros was initially owned by shareholders but was soon converted into a cooperative, with shares offered for free to any customer. A fundamental distinction between Migros and other large industrial cooperatives — for example, Mondragón Corporación Cooperativa,10 which is based in the Basque region of Spain — is that Migros is owned not only by its employees but also by its customers. In effect, founder Gottlieb Duttweiler gave his customers the power to vote him out if they were ever unhappy with his performance. As it turned out, the Migros cooperative kept him in office until his death in 1962. In this way, Duttweiler had assumed the tremendous collective authority of the Migros swarm by empowering its members to decide who should lead the cooperative (that is, he gained power by giving it away). Today, the 1.9 million Swiss who are Migros owners must annually approve the cooperative’s budget, and those who want to be more active can apply to join the assembly of delegates.

To spread its wealth, Migros spends 1% of its annual revenues on projects that benefit Swiss society as a whole (that is, the company shares with the swarm). In a mountainous country where geography limits land use, the company has established golf courses that are open to everyone, in sharp contrast to the elitist facilities only the wealthy can afford. Migros also funds a system of vocational schools that have been built across the country, becoming Switzerland’s largest non-state-owned educational institution. And it has established its own recording label, Musiques Suisses, to bring to the public little-known works from the history of Swiss music.

Notably, when Migros launched its M-Budget product line, it wasn’t necessarily looking to expand its profits. Rather, the primary goal was to grow the Migros swarm by including those with low incomes and large families (that is, Migros was concentrating on the swarm). This move eventually paid off: In 2005, the 350 products of the M-Budget product line contributed almost $400 million to the company’s annual revenues of $16 billion. Those impressive numbers aside, Migros will not put profits above the welfare of its swarm. For instance, out of concern for the health of the Swiss, the owner-customers of Migros have refused to sell alcohol and tobacco — a restriction held over from the firm’s founding days.

MIGROS IS NOT THE ONLY LARGE ENTERPRISE deploying the principles of a swarm business. To varying degrees IBM, BMW, Novartis and others have all been tapping into the collective creativity of swarms. In the future, we believe that the capability to leverage the power of swarms will become all the more important differentiators and indicators of success. Companies will thrive in this new arena by seeking out and supporting collaborative innovation networks within their own walls as well as those that span outside their organizational boundaries. They will view swarms as their stakeholders, and place the interests of those groups above that of their shareholders. In summary, swarm businesses are a growing reality and companies would do well to adjust their thinking to this new mindset. After all, when technology, innovations and ideas are being shared openly, and when competitors are increasingly giving their products away for free, how long can the old business objectives of short-term gain and quick riches really last?